Consortia - The first china consortium

In the early years of the twentieth century, a number of American
financial institutions accumulated capital for which they sought foreign
markets. J. P. Morgan and Company, Kuhn, Loeb and Company, and National
City Bank of New York were prominent among firms interested in investing
funds outside the United States. Opportunities for domestic investment
were still plentiful: the United States remained a capital-importing
nation, and Europe remained the world's banker until World War I.
Opportunities for greater profit, however, were believed to exist abroad,
and American bankers became deeply involved in the financial affairs of
countries such as Mexico, Cuba, Haiti, the Dominican Republic, and
Nicaragua. To a lesser extent, some bankers and industrialists were
interested in East Asia, especially China. China was attempting to
modernize, preferred U.S. capital to European or Japanese, and the Chinese
government was a better credit risk than a number of U.S. state
governments.

There were, however, other kinds of risks involved in investing in China.
The Caribbean was an American lake, dominated by the growing power of the
United States, and investors were confident that the U.S. government would
protect their interests in Caribbean countries. But in China all of the
great European powers and Japan struggled for advantage, sometimes
political as well as economic. With rare exception, the U.S. government
had shown itself disinclined to become involved in Chinese affairs,
unwilling to give American businessmen support comparable to that which
their European and Japanese competitors might reasonably expect from their
own governments. As a result, little U.S. capital could be found in China
in 1909, when William Howard Taft became president of the United States.

Taft was eager to expand American influence and power, and his
administration was noted for its use of "dollar diplomacy"
to achieve its ends. Taft not only continued Theodore Roosevelt's
support of U.S. economic interests in Latin America, but also backed
enterprises in places as remote as Turkey. The most striking contrast
between the policies of Taft and Roosevelt could be found in East Asia,
where Taft refused to acquiesce in Japanese expansion in Manchuria. He
believed that Chinese and Americans shared a mutual interest in preventing
Japanese hegemony over China's northeastern provinces and that the
development of American economic interests in that region would serve the
interests of both nations—perhaps all nations. Several schemes for
forcing American capital into Manchuria, most notably the
"neutralization" plan of Secretary of State Philander Knox,
a scheme for internationalizing Chinese railways, failed; but in China
proper the Taft offensive met with one apparent success: American bankers
were awarded a share in a loan for the building of the Hankow-Canton or
Hukuang Railway and allowed to join what became known as the consortium.

A group of American banking firms had come together in the last year of
the Roosevelt administration to explore investment opportunities in East
Asia, but had not acted in the absence of interest in the White House or
on the part of the secretary of state. When Taft and Knox insisted, early
in 1909, that the United States be allowed to participate in the financing
of the Hukuang, the existing banking group was formally designated the
American group and called upon to play the American role—if the
British, French, and German groups, and their respective governments, as
well as the Chinese government, would honor the American demand.

In June 1909, as a syndicate of British, French, and German bankers was
about to conclude negotiations with the Chinese, Knox filed a formal
protest, reminding the Chinese government of assurances it had given in
1904 that the United States would be able to share in any loan to build
the Hukuang. Choosing to see the exclusion of the United States as an
unfriendly act, Knox threatened to discontinue the remission of indemnity
payments resulting from the Boxer Rebellion in 1900. Responding to
American pressures, the Chinese urged the British, French, and German
bankers to share their concession with the Americans. Almost a year of
haggling over the terms of American participation followed, featuring the
personal intercession of President Taft and the Department of
State's refusal to permit the American group to accept anything
less than a full quarter share of all components of the project. The
American group, recognizing that its share of the bond issue that would
ensue from the Hukuang loan would likely require listing in European
exchanges, was willing to compromise with the European bankers in order to
retain goodwill and preserve their own profits. The Department of State,
however, was far more concerned with American prestige and influence,
presumably contingent on the American group's participating on a
basis of absolute equality. Finally, in May 1910, an agreement was signed
between the three European banking groups and the American group that not
only permitted the Americans to share in the Hukuang loan but brought them
into the banking syndicate. As of the signing of the agreement, bankers of
Great Britain, France, Germany, and the United States were united in a
four-power consortium, committed to sharing equally all future business in
China.

But the creation of the consortium did not lead to the immediate
consummation of the Hukuang loan. To the consternation of the bankers, the
Chinese government backed away, fearful that coming to terms with the
consortium would exacerbate mounting unrest in China and lead to a
revolution. Opposition to foreign control of China's railways was
growing among educated Chinese, and there was, in addition, a desire by
provincial gentry to prevent central control of railways. The consortium
bankers insisted that a preliminary agreement was binding upon the Chinese
and asked for and received diplomatic support from their governments. The
U.S. minister to China, William J. Calhoun, was greatly embarrassed by
instructions that he demand that the Chinese conclude the loan
negotiations. He argued that it was undignified, "unworthy of
civilized powers," to force a loan on an unwilling government. But
Calhoun's protests were brushed aside, and the U.S. government
joined in the pressures to which the Chinese succumbed in May 1911. As the
Peking government anticipated, conclusion of the £6 million loan
led to increased violence in the provinces and ultimately to revolution.

Even Calhoun was willing to drop his opposition to the loan if the loan
operations were essential to continued cooperation between the United
States and its new European partners in China. In Washington, this
cooperation was deemed vital to the furtherance of U.S. interests in
China. Participation in the loan was a wedge for American investments,
which would lead to expanded U.S. trade, greater public attention to East
Asia, and a greater role for the United States in the political affairs of
the region. By forcing the consortium to admit American bankers, the Taft
administration assumed it had reserved a place at the table at which the
future of China would be played out. As long as the game promised to be
profitable, the bankers of the American group demonstrated a grudging
willingness to play the pawn.

While negotiations over the American role in the Hukuang loan were under
way, the American group responded favorably to a Chinese request for
another large loan, partly for currency reform and partly for Manchurian
development. The Chinese hoped that by turning to the American bankers
they could obtain better terms than were available from European
bankers—that they could play off the American bankers against the
Europeans. To Knox, the Chinese proposal held the dual promise of American
hegemony over Chinese finances and an opportunity to penetrate Manchuria
in order to fulfill the goal of checking Japanese expansion there. The
American banking group, however, brushed aside the visions of both the
Chinese and the Department of State by insisting on offering the new loan
to the European bankers. Again, the problem was the shortage of capital in
the United States, which necessitated an international listing of the bond
issue for the loan to be floated successfully. If the American group
offered the currency loan to the European groups, the Europeans might
prove less disagreeable about having been forced to offer the American
group a share in the Hukuang loan and allow the American group to list the
bonds of both its loans on European exchanges. Profits for the American
bankers would thus be assured. The Chinese were indignant, but once Knox
was converted, he bludgeoned them into permitting the currency loan to be
taken over by the consortium. The currency loan was never issued, however,
because the revolution began.

The creation of the four-power consortium worried the Japanese and Russian
governments, especially when they learned that part of the currency loan
was earmarked for use in Manchuria. The Russians attempted to block the
loan, and, failing at that, they tried unsuccessfully to destroy the
consortium by urging the French—to whom they were closely tied,
politically and economically—to withdraw. Ultimately, the Russians
accepted French assurances that their interests in Manchuria could best be
served if they too joined the consortium. As early as November 1910, while
the Russians were still being obstructive, the Japanese concluded that
their interests could be protected most readily from within and expressed
an interest in membership in the consortium.

Knox was willing to allow both the Russians and the Japanese to have a
share in the loan business, but not in the management of the consortium.
The bankers of the consortium were not eager to share their profits with
new partners. Both the British and U.S. governments tried instead to
reassure the Russians and Japanese by specifying the particular Manchurian
enterprises for which the consortium would provide funds, trying to
demonstrate the absence of any intention to threaten the existing
interests of the two Manchurian overlords. But the Russians and Japanese
continued to fear that the Chinese intended to allow the consortium a
monopoly on development loans in Manchuria and were still opposed to the
terms of the currency reform loan in October 1911 when the revolution
began.

As Ch'ing rule of China disintegrated and warfare spread along the
Yangtze River, the U.S. government surrendered its hope of using the
consortium or other forms of dollar diplomacy against Japan and Russia in
Manchuria. With China less able than ever to protect its own interests in
the frontier regions of the empire, Knox and his assistants concluded that
American interests could be furthered only by cooperating with Japan and
Russia, settling for an equal opportunity to trade in Chinese provinces
under their control. The British Foreign Office reached similar
conclusions, joining Knox in recommending that Japan and Russia be invited
to join the consortium. Both France and Yüan Shih-k'ai,
strong man and later president of the Chinese Republic, agreed; but the
American bankers, reinforced by the Germans, both government and bankers,
opposed Russian participation.

As Yüan's regime began to assert itself over the country,
his prime minister, T'ang Shao-i, notified the consortium's
representatives in Peking of his interest in a £60 million loan to
enable the government to reorganize, pay off advances, and proceed with
development projects. In return for an option on the reorganization loan,
the consortium bankers agreed to an immediate advance on the currency
loan. A few days later the consortium bankers learned that the Chinese had
concluded another loan, with a Belgian syndicate that included the
Russo-Asiatic Bank—the main instrument of the Russian equivalent of
dollar diplomacy. To the Russian government and to bankers of England and
France who were excluded from the consortium, the opportunity to disrupt
the consortium's efforts to monopolize China's financial
transactions proved irresistible. Similarly, the Chinese were delighted to
find other bankers to play off against those who combined in order to
dictate the terms under which China could obtain foreign capital. The
consortium bankers were outraged and broke off negotiations with
Yüan's government.

The few bankers involved in the consortium, of whatever nationality,
wanted a monopoly over all Chinese loans. Their governments, especially
the British and U.S. governments, were uneasy about the demands of their
bankers and were more interested in establishing and preserving order in
China and in using economic cooperation as a base upon which political
cooperation in China could be built. The governments were more receptive
to Chinese requests for a relaxation of the foreign controls that the
consortium bankers demanded and were ready to admit Japan and Russia to
the organization if that was necessary to facilitate operations in China
proper. In addition, European political considerations made pacification
of Russia imperative to France and Great Britain. Consequently, the French
and British governments pressed for the admission of Japan and Russia to
the consortium, appeasing the consortium bankers by forcing British and
French participants in the Belgian loan to withdraw, which led to
cancellation of that transaction.

Although Japan and Russia were both interested in joining the consortium,
they stipulated the exclusion of Manchuria and Mongolia from the scope of
the organization's operations. The British and French governments
were willing to accept the Russo-Japanese terms, and in May 1912, Knox
assented, but it was June before a formula agreeable to all concerned
could be discovered. In June 1912, the six-power consortium came into
existence, and more money was advanced to Yüan's regime.
Yüan used the money to consolidate his position against his
enemies, especially against Sun Yat-sen's supporters in the south
and in parliament.

As Yüan sought more money, the banking groups were caught up by the
political machinations of their governments in the selection of foreign
advisers to oversee the expenditure of the monies loaned. European
politics prevailed as Britain, France, and Russia supported each
other's proposals to the detriment of German suggestions.
Yüan became increasingly irritated with the consortium, his
political opponents anxiously opposed further loans, and the American
bankers wearied of the entire process. The U.S. minister to China had
never been comfortable with the loan operations, and by 1913, Sir John
Jordan, the British minister, considered the consortium arrangements to be
of benefit to the one British bank involved but detrimental to British
interests generally. To the American bankers there appeared little
prospect for reasonable profits. The U.S. government had abandoned hope of
playing an important role in Manchuria. Only the principle of cooperation,
to which the State Department had dedicated itself, remained. In 1913 the
new U.S. president, Woodrow Wilson, did not consider cooperation with
European or Japanese imperialists a virtue, and he refused the American
group the support it no longer wanted. In April the American role in the
consortium was terminated.

Wilson mistrusted the Wall Street bankers of the American group, and he
mistrusted their foreign partners. He suspected the consortium of seeking
to take advantage of China's weakness to infringe on Chinese
sovereignty and to profit at the expense of the Chinese people. He wanted
to help China but was determined to find another way. Yüan was
pleased, hoping that an American loan on better terms would soon be
available. But American money was not forthcoming, and Yüan,
desperately in need of money, concluded the reorganization loan with the
remaining five members of the consortium. His position thus strengthened,
Yüan was able to crush a rebellion led by Sun's Kuomintang
(Nationalist) Party.

By April 1915, with Europe embroiled in warfare, Wilson recognized
Japan's intent to dominate China, as evidenced by the Twenty-one
Demands (1915). To check Japanese imperialism and further American
interests in China, he designed his own version of dollar diplomacy.
Although hostile to the American group because of its monopolistic
practices and attempts to infringe on Chinese sovereignty, Wilson was very
much interested in the use of American capital to further the process of
Chinese modernization. He failed, however, to elicit interest among other
American bankers, and, in response to a request from the Chinese
government in 1916, Wilson asked the American group to consider a loan to
China.

The member banks wanted to disband the American group but were held
together by their inability to rid themselves of their share of the
Hukuang loan. They responded negatively to Wilson's proposition,
refusing to compete with the consortium and willing to consider a loan
outside the scope of the consortium only if the U.S. government would
offer a guarantee that China would fulfill its obligations. The government
would not offer a guarantee and appealed instead to the bankers'
patriotism. But the bankers would lend to China only as a business
proposition, and the matter was dropped.

When a U.S. bank outside the American group entered into a loan agreement
with the Chinese in 1916, the other consortium banking groups protested
angrily. Wilson rejected the protests, warning the British, French,
Japanese, and Russian governments against excluding American bankers from
participation in Chinese affairs. With most of these governments anxious
to avoid conflict with the United States while involved in a
life-and-death struggle with the Central Powers in Europe, their bankers
could count on little support against an invasion of American capital.
There was one hope: British, French, Russian, and Japanese bankers
expressed a desire to see the United States rejoin the consortium, to
co-opt the United States and contain the financial offensive the American
bankers were now presumed capable of launching.

In March 1917 the American group notified the Department of State that it
favored accepting the invitation to rejoin the consortium, contending that
the time was ripe for advancing American commercial prestige. But Wilson
was unyielding: loans should be made directly to China and not through the
consortium. The president recognized the overtures from the consortium as
an attempt to prevent independent American action.